If you are thinking of buying a property at auction you may want to buy in the knowledge that the finance is highly likely to be available.
Of course if you can arrange a standard mortgage this would be ideal as the rates are lower than bridging. However in an auction scenario getting a term mortgage may not be an option due to the condition of the property, affordability or time constraints.
Fortunately there are lenders which are prepared to make you an offer based on the purchase price of the property so you can bid in the knowledge that you have an offer in principle from the lender to cover a percentage of the purchase price.
Properties for sale at auction often need refurbishment or structural work and are generally bought by investors or developers/ builders to make a profit on resale or to rent out. Consumers looking to buy a cheap house to live in should be cautious as the property may have some flaws which are not immediately obvious. If you are not an expert take a builder or surveyor with you to view the property before you bid.
Auction Bridging loans / short term borrowing are not the cheapest form of credit so always weigh up the costs of bridging finance versus the benefits
Advantages of auction bridging loans
- You know you have an agreed facility in principle
- Bridging can complete quickly if you need to start work on renovations
- You can add the interest to the loan so cash flow is unaffected
- If you add the interest there are no affordability checks
- Bridging lenders are less concerned about your credit history
- Bridging lenders have different products to accommodate varying conditions of the property or property types.
- You know your costs at the outset so can budget accordingly
Disadvantages of auction bridging loans
- The rates /costs are higher than a standard mortgage
- You must be able to demonstrate how you will repay the loan – e.g. sale
- You need to repay the loan within the agreed term
- All loan offers will be subject to final lender sign off and a valuation– make sure you have accurately declared the condition of the property and your circumstances.
- You can borrow up to 75% LTV (loan to value) of the auction hammer price – to include all interest costs and fees you add to the loan. The LTV may be lower if the risk is higher e.g. poor property condition.
- Rates are from 0.65% per month but may be higher subject to LTV and property condition
- Lenders usually charge fees which can be added to the loan and range typically from 0 to 2%
- There may be a brokers fee depending on the type of the loan and amount. Promise Money will make this clear as soon as it is known.
- Exit fees – typically there are no exits fees although there may be a discharge fees to cover legal costs which is usually in the region of £100 to £150.
It should cost you nothing to get full terms from a reputable broker which will be tailored around your specific requirements and detail all of the costs involved. You can then decide if you want to proceed without incurring any costs.
Pitfalls to beware
- Make sure the information you provide about the property and its condition is accurate – i.e. its not a plot, off plan or in need of major work.
- Ensure you have enough additional cash to complete the purchase and any refurbishment
Ensure your timescales are realistic so your offer doesn’t expire or the loan goes over the agreed term.
- Check your agreement to see what happens if you don’t pay the loan back by the agreed date – some lenders charge a higher interest rate
- If you are intending to pay off the auction bridging loan with a new loan or mortgage, make sure you can get refinance – make an application now
- Don’t borrow more than you need – check your numbers
- Make sure you understand the cost of the finance over the expected term
- Make sure you have the deposit available – normally 10% paid at the auction
- Consult your solicitor to avoid any legal pitfalls – don’t wait until you are committed.
The great thing about auction bridging loans is that the lenders are open to all sorts of scenarios provided there is equity and the security is reliable – i.e. they can sell it and easily get their money back. If the property is quirky or it’s just a piece of land it’s always worth asking for terms.